Flipping - Legal And Illegal
What types and tatics of flippings are considered illegal or fraud?
Which are not?
I have read a alarming news about illegal flipping in US that have FBI started to crack down.
[ Edited by jamesCA on Date 09/19/2004 ]
Flipping, in itself, is 100% legal.
Common fraudulant flipping schemes origionate from lying to the lender (not reporting somethin on the HUD1) and having an insider or such falsely appraise the property for more than it is worth.
FYI, i'm in Florida, so check you own state law. But these wholesaler who assign contracts (flipping) and do not have an active license to practice real estate are commiting a 3rd degree felony. It was only a misdemeanor until this past july. A lot of wholesaler say the realtors just don't under what they do, but this isn't up for debate..its the law. Anybody who gets compensation, for "a bar sale", pertaining to real estate for another person (exempt for your own property...buying/selling) is in direct violation of ch. 475 of FREC handbood. And the whosesalers are getting up to 10k for assigning the contracts. I would strongly advised taking some type of course (like real estate sales associate) so you do not get in trouble.
jamesCA
The problem comes when one does not actually take ownership in the property.
To avoid complications such as this the property should be in your name or your company name.
Sub2 investing is a good start area for you.
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Are you saying that in order for someone to flip properties in Florida, they need a real estate license? What if the contract is in your name and or assigns?
Thanks.
Quote:
On 2004-09-19 15:49, rlpii wrote:
Are you saying that in order for someone to flip properties in Florida, they need a real estate license? What if the contract is in your name and or assigns?
Thanks.
What I am saying is that when one does not take ownership of the subject property you will endanger your self by acting as a realtor without a license.
On just simply needs to understand and assess their risk and above all understand your state laws.
Having an investment under contract does not give you ownership until you take the subject property by title.
I simply avoid this by leaving the title open and do what is called a double close.
I have also taken property by contract and sold the contract to another, but the fact remains not taking title can leave one in danger.
_________________
John Michael
Success one deal at a time!
[ Edited by JohnMichael on Date 09/19/2004 ]
I have held a real estate license before and do understand that the NAR is very powerful and all controling but, how in gods name can someone tell me that as long as I am only representing myself and not a third party, that I need a license to buy, trade, assign or sell real estate. I could always go and get a license here but then you deal with telling the property owner that "You are a real estate professional, will being buying below what the property is worth, and am in it only for profit". Is that a better solution?
Not mad just trying to figure out if I should get my license or not. Have been told to do it both ways.
Thanks. :-?
rlpii
If you take title in your name then you represent your self, but if you do not take title in your name than you are representing a 3rd party.
I do not like the law, but it is the law!
NAR does have too much power and is reaching areas they should not be; they should focus on realtors and leave investors alone.
Good investors help people in areas that most realtors cant, do not know how or even understand how.
Continued law changes in real estate investing will only affect consumers who need help.
I am a real estate investor and I am in it for the deal the profit is only the benefit of the deal.
I understand your frustration, but I was only stating the facts and if you don't like the law than your only choices is to not work in those boundaries or change them through legislation.
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JohnMichael,
I disagree. When you are assigning a contract, you are not representing a third party, nor are you selling real estate. You are selling your ownership interest in real estate. If you offered "valuable consideration", and have a fully ratified contract, you indeed have ownership interest in the real estate. Therefore you are representing yourself in a different transaction.
bnorton
You can agree with me or not but the law is the law and your only choice is to not work in those boundaries as specified by law or change them through legislation.
You stated when you are assigning a contract; you are not representing a third party!
In my limited experience and of course slowness who are you assigning the contract to? Is not this person you are signing to a 3rd party.
Let me see the owner is the 1st party and then you take it under contract and you become the 2nd party and now you assign the property to yet another and would this not be the 3rd party.
Let's look at this another way you sell the contract to another party but it's not selling real estate so tell me what is the sale for if not real estate?
You also said If you offered "valuable consideration", and have a fully ratified contract, you indeed have ownership interest in the real estate Therefore you are representing yourself in a different transaction.
But we need to go back to your first statement when you are assigning a contract; you are not representing a third party! And not selling real estate.
Now I'm confused how can you have it both ways? It's real estate or not, it's 3rd party or not, it's ownership or not?
WOW this is getting fun!
Forgive my sarcasm on this subject but do you have any laws that you know of that will justify acting as a realtor with a license.
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John,
All sarcasm aside, part of the difference between a broker and a wholesaler with ownership interest is that the broker does not have a legal duty to perform with regard to settling on the property. The wholesaler does, and that is a huge difference. The wholesaler does not receive a commission from the seller for putting the seller and a buyer together, which would be representing the seller in a third party transaction, and by definition acting as a broker. The wholesaler is paid what his buyer believes the contract is worth.
The real estate is what gives the contract value, but when you sell the contract, you are selling just that, the contract. It is the same thing as selling an LLC with real estate as an asset. In fact, many wholesalers do this to do double closes without paying transfer a second time, which is a practice I disagree with. Lets take this into a different situation. Lets say you own an IT company, and you land a large contract with the government. Then another company wants to buy you out. That contract added value to your company such as the real estate adds value to a contract. When you sell the company, the IT contract goes with it as an asset. The same is true with assigning a contract. The real estate goes along as an asset.
Now, I doubt your experience is limited, not do I expect you are particularly slow. I wouldn't even think of arguing MO real estate law with you. But, in general, this is why wholesaling is legal. And, my attorneys, and my Realtors not only agree, but they also profit from the few wholesale deals I do.
One last thing. There are many wholesalers out there who do their best to cut the realtors out. Many also put a ton of weasel clauses in their contracts. I disagree with their methods of doing business. In fact, it could be argued that the ones with the weasel clauses are acting as a broker without a license, because it is obvious they don't intend to close. Here in Maryland, we even have folks who call themselves wholesalers, and are assigning contracts and LLCs that don't exist. Not only is that acting as a broker without a license, it is out and out fraud. I even came across one idiot who put it in writing. He actually had a signed contract with someone that gave him the exclusive right to sell their real estate. And of course, he had no license. That is down right bold, and I hope he gets caught. But for those who are legitimately wholesaling, I do know it is legal in most states including Maryland.
The legal presumption is not "interest in real estate", its "hold legal or equitable title". Plus, the proof of burden is on the defendant (the person assigning, if someone files a complaint to the dpbr). My question is, lets say you do a double closing, the wholeseller advertises the property he intends to assign. Well, at that point in time, he doesn not have "legal or equitable Title". Well per the law, advertising is A BAR SALE. Can they still get in trouble (by trouble i mean 5k fine and/or 5 yrs in jail per transaction).Only exemption i know of the person is salaried and/or personal property.
This debate could go back and forth without anyone agreeing.
Here is how I see it after talking with the Powers to Be in North Carolina that regulate real estate transactions in their state. Now I will agree that all states have there own statutes, so there are always different rules.
The State of North Carolina says if you put a property in a Land Trust or do a Lease Option (they are looking heavily into L/O's) then you are considered brokering without a license, period.
This was brought on by complaints being filed. No complaints filed then what your method of investing may be may not come to light with the state.
Normally in wholesaling the property it is flipped to another buyer so everyone seems to be happy. However I notice a question being asked all the time "how do I hide the fact from the seller on how much I made on the deal?"
One day a seller is going to file a complaint and then the investigation will begin. At this time it will be up to the wholesaler to document they had ownership of the property per the guidelines of real estate transactions in that state.
There is a broad similarity between Lease Optioning a property and Wholesaling a property in either case both parties do not have the deed or ownership on record of their interests in the property, however they are selling a property with pieces of paper saying they can. Sounds just like what realtors do.
But, I think what most investors are missing is how does a creative real estate transaction comply with Consumer Protection Laws also.
This area has been overlooked but is coming into play more and more as times change with the states looking to protect their citizens.
Land Trusts and L/O's not allowed, who would have figured, well someone has.
John $Cash$ Locke
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Much of this gets back to disclosure, and who you are wholesaling the contract to. I see wholesaling as something that is done between investors. When I wholesale a contract the investor who buys the contract has a copy of the original contract, and the assignment contract that states exactly what I am making on the deal. If they don't like what I am doing, they don't buy. If they do they do. When I am buying from a wholesaler, I insist on seeing the original contract. That is the only way I know what I am agreeing to. And, I want my wholesalers to make money. All this cloak and dagger stuff is for the birds, and is causing a problem for professional investors. It is impossible to buy from the folks who I mentioned in my last post, because they are scared someone is going to steal their deal. So they don't even want to disclose the address. Just be honest, do it right, only wholesale to other investors, preferably cash buyers, disclose everything, and leave enough in the deal for the next investor, and you should have no problem. Be ethical and honest. It is not rocket science. It is a very simple formula.
Yeah, i'm scared of a 5k fine and up to 5 years in jail. I did find out that though, an investigation in the state of florida, they will weight the lenght of time you have title to a property (and 12 secs does not cut it). Plus, as i mentioned earlier, the advertising plays a role too. I endored the online manual on chapter 475(frec) and chapter 455(dbpr) and in black in white, it is not up for debate. I'm not saying i agree w/the law, i just buy into it, so i do not get in trouble. Plus an option contract (again, this is for the state of florida), prepared by a wholeseller who does not carry an active license, is an illegal object and is "null and void" (straight from the horses mouth). The option contract is one of the four contracts a licensees is allower to prepare, not a non-lincensee.
Very simple just get a deed signed and record one hour before selling the property and you are the owner.
All day long. I have one going wed of this week. all legal.
So bite (ha-ha)
At one point, you must have adverstised. anyways, if you ever get a complaint, the burdon of proof is on you. Not fun having the dbpr investing on you and state attorney. Remind me, has a lawyer's opinion ever been wrong? oh, at the time of the preparing of the contract, did you have legal title? anyways, thats my fair share of cents. My credetials (which these senerios were explaned) are rei and DEA rep from dpbr. so (ha-ha)
Laws are just written words, up for interpretation until a case comes before the courts. Give me a case where flipping came before the courts and the assignor was found to have broken the law and given a penalty. Until that happens, we are all just arguing our own interpretation of the law. Might as well be discussing religion.
Brenda
Alright, the sky is blue......ready, debate!!! j/k
By the way, what the hell is a "bar sale". Is that some new definition by regulators to rationalize their rules to interfere into transactions?
Funny, I did not know that there was a law stating that the sky was blue. Only proves my point that laws are meaningless until they are brought before the courts.
Brenda
"A BAR SALE" is an acronym.
Why would the NAR try to "conspire to fix a commision rate" when that is directly violation of the sherman anit trust (1890) and clayton anit trust (1914). Was this recent?
Paradise,
Do tell... What does A BAR SALE stand for?
Advertise
Buy
Appraise
Rent (or provide rental information)
Sell
Auction
Lease
Exchange
I am a realtor, so do I have to share my flip commisions with my broker? You are working under that company so that would only make sense. I would not want to do that, who would!
I know that smart people at this site say the sky is blue, but yesterday evening it sure looked orange and then black. But hey, smart people at this site say the sky is blue, so it must have been blue.
Brenda,
Actually it is fairly easy to explain why the sky appears blue.
It referred to commonly as the Rayleigh scattering--after Lord Rayleigh, who studied it in detail. He showed that the amount of light scattered is inversely proportional to the fourth power of wavelength for sufficiently small particles.
It follows that blue light is scattered more than red light by a factor of (700/400)4 ~= 10.
However you statement "Laws are meaningless" would require further explanation as meaningless means "lacking purpose or significance".
So are you saying when the law says the speed zone is 35 mph, however if you are going 60 mph in this 35 mph speed zone and received a ticket for breaking the law would your defense in front of the Judge would be "laws are meaningless."?
I think the pro and con of this thread is "Have your ducks in order should there be a problem." Times surely change and as they do we as creative investors must adjust to those changes.
John $Cash$ Locke
[addsig]
OK, so laws are not meaningless. But my point is that a law that has never been tested in the courts, is up for interpretation. It is not my interpretation or your interpretation that matters. It is the courts interpretation.
Quote: So are you saying when the law says the speed zone is 35 mph, however if you are going 60 mph in this 35 mph speed zone and received a ticket for breaking the law would your defense in front of the Judge would be "laws are meaningless."?
I would never say laws are meaningless to a judge in traffic court. I think speeding laws have been through the courts a number of times -though not by me personally. That is why everyone knows that the penalty for speeding could be a ticket.
Brenda
FBI tightens cuffs on real estate fraud
www.Inman.com, CA - 2 hours ago
... While the FBI has had success in dismantling a number of financial fraud rings, many real estate fraud perpetrators managed to escape investigators and are now ...
See full story: http://www.inman.com/inmannews.aspx?ID=42927
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Buddy,
I certainly agree with you that this debate has had more heat than light so far. But I have great hopes for it.
The Blue sky reference was to a joke by Paradisecity Quote: Alright, the sky is blue......ready, debate!!! j/k aparently implying that this debate is pointless.
BTW, speaking of light and heat the 4 in John Lockes equation should be a superscript but that is not a font available in the forums. The equation is not (700/400)4 but (700/400) to the 4th power. The solution is correct: ~= 10.
So, in an attempt to re-focus the conversation on the issue: Does the State of Florida actually prohibit a principal trading on his own account from flipping a property without having a real estate license?
The reference to FREC section 475 is interesting, since it appears to give a specific citation. However section 475 is very large and covers all aspects of real estate transactions. Could Paradisecity give us a more specific citation?
In the absence of a stuatory reference I'm going to come down on the general principle: you must have a license to accept a commision or fee for selling, leasing, trading or negotiating on behalf of a third party dealing in real estate. But to sell, lease, trade or negotiate on your own behalf no license is necessary. But again, Paradise, if you'd like to point us to the relevant paragraphs of section 475 or to a case where somebody was convicted of this felony I'd be willing to give your claim more credence.
Finally turning to the original question. Unless otherwise regulated by statute in your area it is not the act of flipping that is illegal. Many flipping schemes seem to also rely on some fraudlent representation and that fraud is, of course, illegal.
While everyone has been busy thumping the laws and calling people nit wits, I took a different approach to this situation called the "Art of Negotiation."
I called Mr. Brogden from the NC RE Commission recently and did so without reference to the pending litigation and investigations regarding Diane B.'s problems.
I asked some questions revelant to creative investing from my perspective, I was given straight forward answers by Mr. Brogden.
Then because Ms. Kathie Russell Esq., Diane B.'s attorney asked for my opinion in this matter I called her and made recommendations that I felt would bring this problem to a quick resolution, which she agreed with and is passing on to Diane for her approval.
So I believe this issue will be resolved shorty for everyones benefit. There are a few matters left to resolve, however they will be far less than the way this issue started out.
I must say I was honored that Mr. Brogden and Ms. Russell both asked me to speak with them. Thank you both.
Vitally important is the fact that TCI has proved to be a valuable source to help the members here, as long as I have contributed to any discussion board this is the first time I have seen a situation like this arise where a state government offical and a question about creative investing was brought to the "light of day".
John $Cash$ Locke
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